NFRA Flags Gaps in Going Concern Audits — What Every CA Student Must Know About SA 570

If you are preparing for CA Intermediate or CA Final Auditing, here is a real-world development that connects your textbook directly to practice. The National Financial Reporting Authority (NFRA) has flagged significant gaps in how statutory auditors handle going concern assessments. The core concern? Auditors are accepting management's forecasts and funding claims at face value — without adequate challenge or independent verification.

Let us break this down clearly so you understand both the exam angle and the professional significance.

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What Is Going Concern and Why Does It Matter?

A business is said to be a going concern when it is expected to continue operating for the foreseeable future — typically at least twelve months from the balance sheet date. This assumption underlies the entire preparation of financial statements. Assets are valued at cost, liabilities are classified as current or non-current, and income is recognised on an accrual basis — all because we assume the entity will not be wound up.

If that assumption is wrong, the financial statements need to look very different.

SA 570 (Revised) — Going Concern is the Standard on Auditing that governs how auditors evaluate this assumption. Under SA 570, the auditor's job is not merely to rubber-stamp what management says. The auditor must independently evaluate whether the going concern basis is appropriate.

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What NFRA Found — The Core Gaps

Based on NFRA's audit quality review observations, here are the recurring weaknesses auditors have been displaying:

1. Blind Acceptance of Management Forecasts

Management prepares cash flow projections and business plans to support their going concern assertion. Auditors were found to be accepting these documents without:

  • Testing the assumptions underlying the projections
  • Comparing forecasts with actual historical performance
  • Identifying whether growth rates or margin assumptions were realistic or overly optimistic

What you must remember: SA 570 requires the auditor to evaluate the process by which management made its assessment, not just the output document.

2. Unverified Funding Claims

Many companies claim they have access to bank facilities, promoter support, or inter-company loans that will resolve any liquidity concerns. NFRA found auditors accepting these claims without:

  • Obtaining written confirmation from lenders or related parties
  • Checking whether existing loan covenants were being breached
  • Verifying whether cited credit facilities were actually undrawn and available

Think of it this way: If a friend tells you he has money in a bank to repay you, would you not ask for a bank statement? An auditor must apply the same logic — only more rigorously.

3. Insufficient Professional Scepticism

This is the broadest concern. Professional scepticism means maintaining a questioning mind and critically assessing evidence. NFRA's findings suggest auditors were not applying scepticism proportionate to the risk indicators they observed — things like repeated losses, negative working capital, or pending litigation.

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How SA 570 Expects Auditors to Respond — A Step-by-Step Logic

Here is a clean logical flow that will also serve you well in exam scenarios:

Step 1 — Identify Events or Conditions Look for indicators of going concern doubt: recurring losses, loan defaults, reliance on one major customer, regulatory action, etc.

Step 2 — Evaluate Management's Assessment

  • Has management even prepared a going concern assessment? (If the company has a history of profitable operations and easy access to credit, a detailed assessment may not always be needed — but if risk indicators exist, it is mandatory.)
  • What period has management covered? SA 570 requires at least twelve months from the reporting date.

Step 3 — Challenge the Assumptions

  • Are revenue growth projections backed by signed orders or contracts?
  • Are cost savings reflected in the plan already under implementation?
  • What happens to cash flows if a key assumption worsens by even 10-15%? (This is called sensitivity analysis.)

Step 4 — Verify Funding and Liquidity Support

  • Obtain third-party confirmation of credit lines
  • Read the actual loan agreements to check conditions and covenants
  • If promoters are providing support, obtain a formal letter of support and assess the promoter's own financial capacity

Step 5 — Form a Conclusion and Report Appropriately Under SA 570, if going concern doubt exists but is adequately disclosed, the auditor may still issue an unmodified opinion with an Emphasis of Matter paragraph. If the going concern basis itself is inappropriate or disclosure is inadequate, a modified opinion is required.

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Quick Reference — Auditor's Report Outcomes Under SA 570

| Situation | Auditor's Response | |---|---| | Going concern appropriate, no significant doubt | Standard unmodified opinion | | Significant doubt exists but adequately disclosed | Unmodified opinion + Emphasis of Matter | | Significant doubt, management unwilling to disclose | Qualified or Adverse opinion | | Going concern basis inappropriate | Adverse opinion | | Scope limitation on going concern assessment | Qualified or Disclaimer |

(Verify exact wording and requirements in the latest ICAI study material.)

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Why This Matters for Your CA Exams

Going concern is a favourite topic at both CA Intermediate and CA Final levels. Examiners frequently ask:

  • What indicators would raise going concern doubt?
  • How should the auditor respond if management refuses to extend its going concern assessment period?
  • What type of audit report is appropriate in a given scenario?

NFRA's real-world findings give you the context to write richer, more practical answers — showing the examiner you understand auditing as a profession, not just a chapter.

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FAQs

Q1. Is the auditor responsible if a company fails shortly after receiving a clean audit report? An auditor's responsibility is to gather sufficient appropriate evidence and apply professional judgement at the time of audit. Subsequent failure of a company does not automatically mean the auditor was wrong — but if evidence shows the auditor ignored clear warning signs, professional and regulatory liability can arise.

Q2. What does 'foreseeable future' mean under SA 570? SA 570 specifies that auditors should consider at least twelve months from the balance sheet date when evaluating going concern. Verify the exact period stated in the current version of SA 570 in your ICAI study material, as guidance may be updated.

Q3. Can an auditor rely solely on a management representation letter for going concern? No. A management representation letter is a form of audit evidence but is not sufficient on its own for high-risk areas like going concern. The auditor must corroborate it with independent evidence such as bank confirmations, board minutes and actual financial data.

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Understanding SA 570 deeply — and connecting it to current regulatory developments like NFRA's observations — will set your answers apart in the exam hall. To make sure you cover every auditing standard systematically and on time, use the free day-by-day study planner at https://caparveensharma.com/free-planner?src=article. And if you want to sharpen your skills on case-scenario questions — exactly the kind NFRA's real-world situations inspire — explore the full courses and free practice tools at caparveensharma.com. CA Parveen Sharma's 36 years of teaching experience are distilled into resources built precisely for serious CA aspirants like you.